Pension funds’ use of exchange-traded funds (ETFs) will remain modest relative to growth in other client segments, Vanguard has predicted.

Drawing on a market survey, the €3.8trn asset manager noted that pension funds often used cheaper alternatives for passive investment, such as index funds and segregated mandates.

Roughly €59bn is currently invested by European pension funds, which equates to just 5% of the entire ETF market. Vanguard said it expected this to increase by 10% annually.

The entire ETF market could grow by 16% during the coming years, Vanguard said, compared to recent annual asset growth of roughly 20%.

Andreas Zingg, Vanguard’s head of ETF distribution in Europe, said that, contrary to investments in index funds or mandates, it wasn’t possible to negotiate ETF fees with asset managers, “as ETFs are listed and every investor pays the same costs”.

According to Zingg, other asset managers and banks were the most important markets for ETF suppliers.

“Other asset managers increasingly use exchange-traded funds as building blocks for their own products, including multi-asset funds,” said Zingg. He suggested that pension funds could indirectly have larger ETF investments through these products.

Pension funds largely deployed ETFs for parking cash, Zingg added, but they preferred a direct stake in equity, bonds, or mandates for long-term investing.

The ETF market has grown fast during the past 15 years and was estimated at €567bn in Europe, largely thanks to the increased appetite for passive investment and a strong reduction of costs.

The number of exchange-traded funds has also increased strongly, but the benefits of scale had dropped in aggregate.

However, Vanguard said that more than 1,500 ETFs had less than €95m under management and couldn’t be economical. Zingg added that a number charged management costs of 80 to 90 basis points.

According to Zingg, these ETFs largely serviced private investors, “who are less costs-aware than institutional investors”.

With a market share of 18%, Vanguard is the world’s second-largest supplier of exchange- traded funds.

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